{"id":38299,"date":"2014-08-16T17:18:27","date_gmt":"2014-08-16T17:18:27","guid":{"rendered":"https:\/\/setterwalls.se\/article\/validity-and-enforcement-of-minority-protection-rights-in-shareholders-agreements\/"},"modified":"2022-02-14T13:42:31","modified_gmt":"2022-02-14T13:42:31","slug":"validity-and-enforcement-of-minority-protection-rights-in-shareholders-agreements","status":"publish","type":"articles","link":"https:\/\/setterwalls.se\/en\/article\/validity-and-enforcement-of-minority-protection-rights-in-shareholders-agreements\/","title":{"rendered":"Validity and enforcement of minority protection rights in shareholders\u2019 agreements"},"content":{"rendered":"

As a general rule under Swedish company law,\u00a0<\/strong>all provisions of the Swedish Companies Act (the\u00a0<\/strong>\u201cCompanies Act\u201d) that protect shareholders (as\u00a0<\/strong>opposed those protecting third parties\/creditors)\u00a0<\/strong>may be departed from provided that all shareholders\u00a0<\/strong>give their consent. It is very common for\u00a0<\/strong>shareholders\u2019 agreements to include provisions\u00a0<\/strong>that depart from the Companies Act on matters\u00a0<\/strong>such as voting rights, share transfer restrictions\u00a0<\/strong>and various minority protection rights.\u00a0<\/strong><\/p>\n

It has been established that only the parties, and not the company, are bound by the provisions of a shareholders\u2019 agreement. The relationship between the parties is governed by civil law and the shareholders\u2019 agreement, whereas the parties\u2019 relationship with the company is governed by the Companies Act and the company\u2019s articles of association. The effect of this is primarily that the company\u2019s bodies (board of directors and managing director), as a rule, are not bound by provisions in shareholders\u2019 agreements. For example, a transfer of shares that violates the provisions of a shareholders\u2019 agreement does not prevent the board of directors from registering the new shareholder as owner of the shares in the company\u2019s share register, although only to the extent that the transfer complies with Swedish company law and the company\u2019s articles of association. The legal effects of such a breach are instead to be found in the shareholders\u2019\u00a0agreement (i.e. specific sanctions agreed between the shareholders) or in general principles of civil law (normally damages or invalidity).<\/p>\n

Minority protection rights in the Companies Act (and in shareholders\u2019 agreements)<\/strong><\/p>\n

As stated above, the parties, and not the company, are bound by the provisions of a shareholders\u2019 agreement. In principle, this means that a shareholder may still force the company to carry out an action in violation of the provisions of a shareholders\u2019 agreement. It is very common in Swedish management (and other minority) shareholders\u2019 agreements for the managers to waive all their minority protection rights pursuant to the Companies Act and thus agree not to invoke any minority protection rights pursuant to the Companies Act. For example, a minority shareholder (or a group of minority shareholders) holding more than 10 % of all shares in a company may request the annual general meeting to approve the distribution of 50 % of the remaining profit for the year pursuant to the adopted balance sheet. Another example is that a shareholder that owns more than 50 % of the voting rights in a company may dismiss and appoint board members despite the fact that the shareholders\u2019 agreement may state that such action requires approval by other shareholders. Based on this, therefore, a majority shareholder cannot be entirely certain that a minority shareholder will not invoke its legal minority protection rights according to the Companies Act against a majority shareholder, even though the parties have agreed on this in a shareholders\u2019 agreement. This also means that a minority shareholder cannot be certain that a majority shareholder will not invoke its legal rights according\u00a0to the Companies Act against a minority shareholder.\u00a0<\/p>\n

The Supreme Court case<\/strong><\/p>\n

The Swedish Supreme Court recently ruled on a case of fundamental interest in the area of company law in general and the relationship between the shareholders\u2019 agreement and the Companies Act in particular. The case concerned the effect of a shareholders\u2019 agreement in proceedings for the compulsory buyout of minority shares and comprised several important questions of principle.<\/p>\n

Under Chapter 22 of the Companies Act, a shareholder who holds more than nine-tenths of the shares in a company (the majority shareholder) is entitled to buy out the remaining shares of the company\u2019s other shareholders. Any shareholder whose shares may be bought out is entitled to compel the majority shareholder to purchase its shares. This is referred to as compulsory buyout.\u00a0<\/p>\n

Two companies each owned 50 % of the shares in a Swedish company. According to a shareholders\u2019 agreement each party had the right, under certain circumstances, to acquire all except one of the other party\u2019s shares in the company. An arbitration award established that the conditions in question had been met and that one of the parties had the right to acquire all except one of the other party\u2019s shares in the company at a certain price level.<\/p>\n

Following the award, the new majority owner requested to buy out the remaining share in the company, referring to Chapter 22 of the Companies Act. The minority shareholder disputed the request and argued that the parties had waived their rights to request a compulsory buyout with reference to the Companies Act according to the provisions of said shareholders\u2019 agreement. The main question discussed was whether the buyout provisions under Chapter 22 of the Companies Act may be departed from by a provision in a shareholders\u2019 agreement.<\/p>\n

The Supreme Court concluded that the provisions of the shareholders\u2019 agreement did not prevent a party from invoking its right of compulsory buyout under the Companies Act. One of the main reasons for this conclusion is that, according to the preparatory works of the Companies Act, a company\u2019s articles of association cannot provide for the right or obligation for a compulsory buyout to be limited or for the provisions of compulsory buyout to be subject to conditions other than those laid down in the Companies Act.\u00a0 The provisions of compulsory buyout are thus not considered to be optional, i.e. the parties cannot deviate from the provisions by agreement.<\/p>\n

The Supreme Court did not discuss the issue of whether the losing party could seek recourse by way of damages or other specific agreed recourse for the winning party\u2019s breach of the provisions of the shareholders\u2019 agreement.\u00a0<\/p>\n

Comments<\/strong><\/p>\n

One conclusion that can be drawn from the case is that the principle that a shareholders\u2019 agreement is valid between the parties is to some extent restricted and that the principle\u2019s scope is now more uncertain than it was before the case. One can therefore not be sure which provisions of a shareholders\u2019 agreement, that restrict a party\u2019s minority rights (or other rights as provided by law), that are considered valid or invalid and therefore enforceable or unenforceable in court. The judgment does not discuss or affect the question of whether sanctions in a shareholders\u2019 agreement linked to a breach of restrictions of compulsory buyout will be maintained (wholly or partially). However, the judgment could ultimately lead to a more restrictive interpretation and application of provisions of shareholder agreements that deviate from provisions of the Companies Act. In order to assess whether or not a provision is valid, one should be able to gain some guidance by studying the purpose of the rules in question in the preparatory work of the Companies Act.<\/p>\n

The case creates problems in general when drafting and negotiating shareholders\u2019 agreements, and in particular when drafting and negotiating shareholders\u2019 agreements when a majority owner is to allow management of the company or other minority investor to own or acquire less than 10 % of the shares in a company. Depending on which side you represent, this case will lead to the majority owner always having an \u201coption\u201d to acquire the minority\u2019s shares and the minority always having an \u201coption\u201d to sell its shares to the majority shareholder, with no possibility for the parties to agree otherwise. This uncertainty also applies to other minority protection rights as described above.<\/p>\n

To handle the problems described above, the parties could include provisions in the shareholders\u2019 agreements that are designed to prevent the other party from invoking its minority protection rights, or vice versa. Many shareholders\u2019 agreements contain provisions entitling a party to purchase the breaching party\u2019s shares at a discounted price in the event of a breach of contract. In many cases the shareholders\u2019 agreement does not provide for different types of sanctions tailored to different types of breaches of the agreement, such as liquidated damages.<\/p>\n","protected":false},"excerpt":{"rendered":"

As a general rule under Swedish company law,\u00a0<\/strong>all provisions of the Swedish Companies Act (the\u00a0<\/strong>\u201cCompanies Act\u201d) that protect shareholders (as\u00a0<\/strong>opposed those protecting third parties\/creditors)\u00a0<\/strong>may be departed from provided that all shareholders\u00a0<\/strong>give their consent. It is very common for\u00a0<\/strong>shareholders\u2019 agreements to include provisions\u00a0<\/strong>that depart from the Companies Act on matters\u00a0<\/strong>such as voting rights, share transfer restrictions\u00a0<\/strong>and various minority protection rights.\u00a0<\/strong><\/p>\n

It has been established that only the parties, and not the company, are bound by the provisions of a shareholders\u2019 agreement. The relationship between the parties is governed by civil law and the shareholders\u2019 agreement, whereas the parties\u2019 relationship with the company is governed by the Companies Act and the company\u2019s articles of association. The effect of this is primarily that the company\u2019s bodies (board of directors and managing director), as a rule, are not bound by provisions in shareholders\u2019 agreements. For example, a transfer of shares that violates the provisions of a shareholders\u2019 agreement does not prevent the board of directors from registering the new shareholder as owner of the shares in the company\u2019s share register, although only to the extent that the transfer complies with Swedish company law and the company\u2019s articles of association. The legal effects of such a breach are instead to be found in the shareholders\u2019\u00a0agreement (i.e. specific sanctions agreed between the shareholders) or in general principles of civil law (normally damages or invalidity).<\/p>\n

Minority protection rights in the Companies Act (and in shareholders\u2019 agreements)<\/strong><\/p>\n

As stated above, the parties, and not the company, are bound by the provisions of a shareholders\u2019 agreement. In principle, this means that a shareholder may still force the company to carry out an action in violation of the provisions of a shareholders\u2019 agreement. It is very common in Swedish management (and other minority) shareholders\u2019 agreements for the managers to waive all their minority protection rights pursuant to the Companies Act and thus agree not to invoke any minority protection rights pursuant to the Companies Act. For example, a minority shareholder (or a group of minority shareholders) holding more than 10 % of all shares in a company may request the annual general meeting to approve the distribution of 50 % of the remaining profit for the year pursuant to the adopted balance sheet. Another example is that a shareholder that owns more than 50 % of the voting rights in a company may dismiss and appoint board members despite the fact that the shareholders\u2019 agreement may state that such action requires approval by other shareholders. Based on this, therefore, a majority shareholder cannot be entirely certain that a minority shareholder will not invoke its legal minority protection rights according to the Companies Act against a majority shareholder, even though the parties have agreed on this in a shareholders\u2019 agreement. This also means that a minority shareholder cannot be certain that a majority shareholder will not invoke its legal rights according\u00a0to the Companies Act against a minority shareholder.\u00a0<\/p>\n

The Supreme Court case<\/strong><\/p>\n

The Swedish Supreme Court recently ruled on a case of fundamental interest in the area of company law in general and the relationship between the shareholders\u2019 agreement and the Companies Act in particular. The case concerned the effect of a shareholders\u2019 agreement in proceedings for the compulsory buyout of minority shares and comprised several important questions of principle.<\/p>\n

Under Chapter 22 of the Companies Act, a shareholder who holds more than nine-tenths of the shares in a company (the majority shareholder) is entitled to buy out the remaining shares of the company\u2019s other shareholders. Any shareholder whose shares may be bought out is entitled to compel the majority shareholder to purchase its shares. This is referred to as compulsory buyout.\u00a0<\/p>\n

Two companies each owned 50 % of the shares in a Swedish company. According to a shareholders\u2019 agreement each party had the right, under certain circumstances, to acquire all except one of the other party\u2019s shares in the company. An arbitration award established that the conditions in question had been met and that one of the parties had the right to acquire all except one of the other party\u2019s shares in the company at a certain price level.<\/p>\n

Following the award, the new majority owner requested to buy out the remaining share in the company, referring to Chapter 22 of the Companies Act. The minority shareholder disputed the request and argued that the parties had waived their rights to request a compulsory buyout with reference to the Companies Act according to the provisions of said shareholders\u2019 agreement. The main question discussed was whether the buyout provisions under Chapter 22 of the Companies Act may be departed from by a provision in a shareholders\u2019 agreement.<\/p>\n

The Supreme Court concluded that the provisions of the shareholders\u2019 agreement did not prevent a party from invoking its right of compulsory buyout under the Companies Act. One of the main reasons for this conclusion is that, according to the preparatory works of the Companies Act, a company\u2019s articles of association cannot provide for the right or obligation for a compulsory buyout to be limited or for the provisions of compulsory buyout to be subject to conditions other than those laid down in the Companies Act.\u00a0 The provisions of compulsory buyout are thus not considered to be optional, i.e. the parties cannot deviate from the provisions by agreement.<\/p>\n

The Supreme Court did not discuss the issue of whether the losing party could seek recourse by way of damages or other specific agreed recourse for the winning party\u2019s breach of the provisions of the shareholders\u2019 agreement.\u00a0<\/p>\n

Comments<\/strong><\/p>\n

One conclusion that can be drawn from the case is that the principle that a shareholders\u2019 agreement is valid between the parties is to some extent restricted and that the principle\u2019s scope is now more uncertain than it was before the case. One can therefore not be sure which provisions of a shareholders\u2019 agreement, that restrict a party\u2019s minority rights (or other rights as provided by law), that are considered valid or invalid and therefore enforceable or unenforceable in court. The judgment does not discuss or affect the question of whether sanctions in a shareholders\u2019 agreement linked to a breach of restrictions of compulsory buyout will be maintained (wholly or partially). However, the judgment could ultimately lead to a more restrictive interpretation and application of provisions of shareholder agreements that deviate from provisions of the Companies Act. In order to assess whether or not a provision is valid, one should be able to gain some guidance by studying the purpose of the rules in question in the preparatory work of the Companies Act.<\/p>\n

The case creates problems in general when drafting and negotiating shareholders\u2019 agreements, and in particular when drafting and negotiating shareholders\u2019 agreements when a majority owner is to allow management of the company or other minority investor to own or acquire less than 10 % of the shares in a company. Depending on which side you represent, this case will lead to the majority owner always having an \u201coption\u201d to acquire the minority\u2019s shares and the minority always having an \u201coption\u201d to sell its shares to the majority shareholder, with no possibility for the parties to agree otherwise. This uncertainty also applies to other minority protection rights as described above.<\/p>\n

To handle the problems described above, the parties could include provisions in the shareholders\u2019 agreements that are designed to prevent the other party from invoking its minority protection rights, or vice versa. Many shareholders\u2019 agreements contain provisions entitling a party to purchase the breaching party\u2019s shares at a discounted price in the event of a breach of contract. In many cases the shareholders\u2019 agreement does not provide for different types of sanctions tailored to different types of breaches of the agreement, such as liquidated damages.<\/p>\n","protected":false},"author":1,"featured_media":34241,"template":"","meta":{"_acf_changed":false,"_seopress_robots_primary_cat":"","_seopress_titles_title":"","_seopress_titles_desc":"","_seopress_robots_index":""},"article_category":[1037],"class_list":["post-38299","articles","type-articles","status-publish","has-post-thumbnail","hentry","article_category-mergers-acquisitions-ma"],"acf":[],"_links":{"self":[{"href":"https:\/\/setterwalls.se\/en\/wp-json\/wp\/v2\/articles\/38299","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/setterwalls.se\/en\/wp-json\/wp\/v2\/articles"}],"about":[{"href":"https:\/\/setterwalls.se\/en\/wp-json\/wp\/v2\/types\/articles"}],"author":[{"embeddable":true,"href":"https:\/\/setterwalls.se\/en\/wp-json\/wp\/v2\/users\/1"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/setterwalls.se\/en\/wp-json\/wp\/v2\/media\/34241"}],"wp:attachment":[{"href":"https:\/\/setterwalls.se\/en\/wp-json\/wp\/v2\/media?parent=38299"}],"wp:term":[{"taxonomy":"article_category","embeddable":true,"href":"https:\/\/setterwalls.se\/en\/wp-json\/wp\/v2\/article_category?post=38299"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}